Ablyazov & Associates: the making of a diversion scheme/I

The crackdown on “oligarchs” in Kazakhstan has taken off much later than the one in the Russian Federation on their Russian peers. But the result is that the “Mother of all Schemes” carried out by the Kazakh Master Maverick Mukhtar Ablyazov and his associates could spread much further and do much more damage to corporate life in Kazakhstan than it has done in Russia and other former Soviet republics. The empire the tycoon-in-the-making had in mind as early as the break-up of the USSR never materialised. But much of the money he gathered by hook and by crook in order to get there has not been to the benefit of Kazakhstan either.

by Charles van der Leeuw, senior KZW contributor

Ablyazov & Associates: the making of a diversion scheme/IMukhtar Kabulovich Ablyazov is a child of the countryside in Kazakhstan’s deep south. He was born on May 16, 1963, in the village of Galkino in the province of Shymkent, close to the border with Uzbekistan. He was raised during the waning years of the Soviet Union under the aging Leonid Brezhnyev, who in the second half of the 1970s had lost most of the dynamics and the charisma he had had a decade earlier, when he consolidated the Soviet Union following the wild years under Nikita Khrushchev and exchanged the surrealistic dream of a world communist empire, once cherished by Leon Trotsky, for a solid Soviet society, economy and industry, with international security limited to a firm alliance under the Warsaw Pact charter.

But as young Mukhtar grew up the spirit of achievement was already dying, and further deteriorated under the guise of Mikhail Gorbachov’s glasnost and perestroika, when economic realities started marring the spirit of pride and power that had dominated society during the Soviet heydays. According to one social scientist in Tbilisi by the name of Anzor Gabiani who in the early 1990s published a number of books on drugs abuse and social conditions that allowed it to happen, ideals were no longer kept up and the teenage generation of the 1980s grew up “in the spirit of Once Upon A Time In America. It was thus that the mentality of everybody-for-himself was cultivated that in the end generated the oligarchs – the immediate post-Soviet business tycoon who would (and in numerous cases did) walk over dead bodies wherever his fortune was at stake.

He must have had it all set up in his mind long before. On December 1992, hardly more than a year after Kazakhstan proclaimed its independence and only weeks after (incomplete) legislation on the establishment of private enterprise had passed, Mukhtar Ablyazov registered his first company “Astana Holding”. Under its “ownership” affiliated enterprises were subsequently registered by the score, starting with Astana Holding Bank – one of the first of its kind to receive a private banking licence. More enterprises were soon to follow, including a trade house named Zhana, an insurance company called Astana Policy, an investment fund called Astana Invest, a security firm called Astana Korgau, an equipment manufacturing company called Astana Tekhnik, an oil company Astana Munay, a sugar processing and trade company called Astana Sugar and an entertainment firm called Astana Theatre. The name Astana (meaning capital in Kazakh) referred to Almaty, since present-day Astana had not yet received its new name and there was yet no sign of a plan to move the capital of Kazakhstan from Almaty.

None of these enterprises had money to speak of. Nor did they make any money to speak of. Cash was still circulating in the upper state echelons and among the elites having it within reach. Hopes cherished by Ablyazov to lure them as deposit holders in his Astana Bank in order to collect the assets based on which he could finance his fledgling business and industry empire failed to materialise. He thereby failed to create the back-up which would be needed to obtain for all his companies the industrial tangible assets he would need to produce and sell in the future. In nearby Russia and further towards the west of the former Soviet Union, the later notorious loan-for-stock scheme was in full swing, and Ablyazov was clever enough to realise that sooner or later it would come home to Kazakhstan as well.

Access to cash remained the main weak spot of Ablyazov and his associates, the latter of whom already included Roman Solodchenko, Zhaksylyk Zharimbetov and last but not least his longstanding friend and business partner Bahybek Bayseitov.  First, it was decided to look for allies, which resulted in the sell-out of Astana Holding Bank to Kazkommerts, today’s Kazkommertsbank or KazKom. The merger, however, failed to generate enough cash control for Ablyazov’s ambition. In order to create a swift-income mechanism, a new trade firm Astana Motors was established which imported and sold mainly South-Korean and Japanese cars to the cash-rich and car-strapped Kazakh elites. Astana Motors made rash and large profits, but still not enough to finance the industrial and service empire the Kazakh young would-be epigon of Rockefeller had in mind.

From that moment on, Ablyazov’s deals started to look dodgier and dodgier. Using Astana Sugar along with his Zhan trade company, he started purchasing sugar beets, of which there is a shortage from Kazakhstan’s local farms which lasts up to this very day, abroad for processing in domestic refineries. With sugar considered part of the basic food basket under state regulations, this allowed him to import duty-free. But rather than offering the end produce on the domestic market, Zhan re-exported it mainly to the Russian Federation where wholesale prices almost double those in Kazakhstan. On top of the import duty loophole, Ablyazov in this way also created a VAT carrousel, since wholesale in Kazakhstan meant for retail sale abroad takes place, like almost anywhere in the world, on the bases of a zero value-added tax rate.

The duty-annex-VAT loophole by Astana Sugar was uncovered by tax authorities in 1996 after at least three major shipments and deals had taken place using it. Arrear tax payments and penalties amounted to the order of a million US dollar. But it seems that by this time Ablyazov and partners had already friends in high places. The debt was formally recognised by Ablyazov in a note which has been preserved, but was subsequently written off by the government, allegedly on the order of then PM Kazhegeldin. Other investigations started into similar trade schemes clinched involving other agro-products, building materials and equipment and oil products ran into a dead-end.

Still, the billions n early 1998, a new opportunity appeared on the horizon. On March 23, the government, following years of long and laborious arm twisting over legislation, finally announced the privatisation tender for the combination of two former Soviet banks put on sale. These were Kazpromstroybank, the Kazakh branch of the former Soviet state bank for construction and infrastructure development, and Kazsneshekonombank, another former Soviet branch through which the earnings on Kazakhstan’s lucrative oil and metal exports used to be funneled to the all-Union treasury in exchange for credit for Kazakhstan’s imports from abroad. The two assets had already be renamed Turan Bank and Alem Bank respectively.

Together with Bayseitov, Ablyazov through his Astana Holding Bank made a bid for both banks for the total sum of 72 million US dollar – and somehow (exactly how is not known) won the tender. Considering the size and importance of both banks, the amount was a hilarious trifle, but still the two were facing trouble raising the money they needed before the deal could be sealed. On March 30, Ablyazov and Bayseitov concluded a deal which made Bank CenterCredit a partner in what was dubbed an investors pool. This formula under the law allowed them to obtain a loan of 765 million tenge. With this money, the takeover was made.

The co-ownership of TuranAlem granted Ablyazov and company access to funding through th eissue of shares and bonds on the newly established Almaty Stock Exchagne (KASE) and through loans from bank syndicates abroad. The latter scheme was only to follow later, but the former one took off rapidly. Funds were first used to buy out CenterCredit and dissolve the takeover pool – in violation of the rules under which it had been established. But already then, TuranAlem had a lot to respond for and most probably even a much bigger lot more to hide. In order to secure himself with the immunity he would need in the eventuality of legal action from the side of the authorities, Ablyazov decided to follow the example of Italy’s media tycoon “Sua Emittenzia” Silvio Berlusconi who little before had done exactly that, as he would later frankly admit in public.

Mukhtar Ablyazov made his way up to Kazakhstan’s political Olympus through the post of president of the country’s national electricity grid KEGOC, which he obtained as of July 18, 1997. In April the following year he slid on to the post of minister of energy, industry and trade, a job considered more powerful than that of anyone else in Kazakhstan with the possible exception of the head of state. He left KEGOC under the sceptre of one of his alleged protegees named Aset Nauryzbayev, who to his embarrassment found a “loss” totalling the equivalent of around 20 million US dollar on the balance sheet over the full year 1997 and the first quarter of 1998, which could neither be explained by asset versus liability valuation let alone by income versus expenditure ratios over the said period. But since his predecessor was now his superior and protected by immunity, there was little he could do and the affair was swift to be covered up.

Up till then, Ablyazov’s wheelings and dealings could be considered plain white-collar crime. It could even be deemed doubtful whether the perpetrator and culprit himself considered doing something wrong. This is the usual attitude of the typical boardroom criminal: “Everybody does it, so what is wrong with it?” To a painfully large extent this self-defence argument holds substance, and today’s financial turmoil only demonstrates the more for it that the world from east to west and from north to south is full of Ablyazovs most of whom shamelessly get away with the harm they have inflicted except for some scapegoats who overestimated their luck’s extents.

The overall atmosphere of let-take and let-go also prevailed in the former USSR towards the end of the old millennium. The 1998 near-crash in the financial arena of Moscow which caused the downfall of former Soviet republics’ pyramid credit schemes brought about some tougher legislation which enabled authorities to eliminate certain individual wrongdoers while leaving the opportunities they abused in place. What during the years that followed was to change the scene thoroughly was the rise of the man who had vowed to change it all: Vladimir Putin. For Ablyazov, the time for major turmoil had come, even though at least in Kazakhstan there would be room for compromise. (to be continued)